HomeMy WebLinkAbout1998-10-26 City Council (12)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: PUBLIC WORKS
DATE:
SUBJECT:
OCTOBER 26, 1998
PALO ALTO SANITATION
WASTE, INC.
CMR:402:98
COMPANY ACQUISITION BY USA
REPORT IN BRIEF
This report presents information to the City Council regarding the sale of the Palo Alto
Sanitation Company (PASCO), and recommends certain actions.
On August 19, 1998, Mr. Paul Madsen, the owner of PASCO, notified the City, by letter to
the City Manager, that he had agreed to sell his stock in PASCO to USA Waste, Inc. (USA
Waste), a wholly-owned subsidiary: of Waste Management, Inc. (WMI). In response to a
request from the City Manager for certain specified information, USA Waste/WMI provided
some information which staff has analyzed. While staff believes the information received
to date to be less than desirable, staffnonetheless believes that reasonable concerns regarding
the acquisition of PASCO Can be addressed if the City and USA Waste can successfully
negotiate a new refuse and. recycling agreement.
RECOMMENDATION ’
Staffrecommends that Co~cil: 1)conditionally approve the acquisition of PASCO by USA
Waste and approve assi~ent of the 2000 Geng Road facili~ ~0 the new PASCO owners;
2) direct staffto enter into discussions with USA Waste/WMI, to address the City’s concerns
and, before March 1, 1999, to negotiate with USA Waste/WMI a memorandum of
understanding (MOU), which will cover the agreed upon scope of and timing for entering
into a new refuse and recycling agreement between PASCO and the City; and 3) Council at
this time grant staffthe authority to give notice of the City’s intent to sunset the agreement
as of June 30,2004, and go out to bid, if the MOU has not been agreed to and presented to
Council for approval.prior to March 1, 1999.
CMR:402:98 Page 1 ot74
BACKGROUND
On August 19, 1998, the City Manager received a letter from Mr. Madsen notifying the City
that he had entered into an agreement with USA Waste of Califomia, Inc., to sell his stock
in PASCO. On September 18, 1998, the City Manager sent a letter to USA Waste/WMI
requesting information (CMR:383:98) that would assist the analysis of the acquisition and
ascertain USA Waste’s organizational structure and business plans. On September 29, 1998,
the City Manager received a reply (Attachment A) to the reques, t, and has now evaluated the
response along with other information obtained.
DISCUSSION
Since receiving notification of the acquisition ofPASCO, staffhas researched and analyzed
USA Waste/WMI operations track record, business goals and motives for acquiring PASCO.
USA Waste recemly received federal government clearance to acquire WMI, making it the
largest solid waste collection corporation in the country. This will be a dramatic departure
from the private, locally-owned entity with whom the City has done business for so many
years.
Analysis of Current Contract with PASCO
While the current agreement with PASCO does prohibit.any assignment or transfer of the
agreement without prior written consent of the City, it does not specifically prohibit Paul
Madsen from selling his stock in the business without the City’s consent. Further, although
the agreement requires that PASCO be operated as a separate entity, the stock acquisition
does not appear to violate this provision because PASCO will be a wholly owned subsidiary
of USA Waste. Staff has been advised by USA Waste that it will not combine or consolidate
the assets, liabilities, revenues, expenses or net worth or in any other way incorporate
PASCO with any other operation. Nonetheless, both USA Waste/WMl and Mr. Madsen
have sought .City approval of the new contractual relationship.
The term of the current agreement with PASCO is a rolling five years. One hundred twenty
days prior to June 30 of any year, the City has the option of giving notice of its intent to
"sunset" the agreement in five years. The City has not exercised that option; therefore, the
agreement with PASCO is in effect at least until June 30, 2004. If the City were to exercise
its option, it could consider other alternatives for refuse and recycling as of the termination
date of the agreement.
The current PASCO agreement requires Council approval of the lease to USA Waste of the
2000 Geng Road storage facility.
CMR:402:98 Page 2 of 4
Analysis of Data Received from USA Waste/WMI
Staff has received some general information from USA Waste/WM! regarding the
acquisition transaction; however, USA Waste/WMI has provided only sketchy information
regarding the business terms of the transaction its future business plans for PASCO.
Staffdoes know that USA Waste/WMI will acquire one hundred percent of the PASCO stock
from Mr. Madsen, and that PASCO will remain as a separate legal entity. Therefore,
PASCO’s retained earnings will remain the same when the stbck is transferred.
USA Waste/WMI asserts that there will be no personnel, compensation or operating changes;
and that the same level of service will be continued. They have stated that Paul Madsen will
remain as Project Director and that the current General Manager, Rich Buchner, will remain
as the District Manager to oversee day-to-day operations and management. In his letter to
the City Manager, Mr. Madsen noted his intent to retire soon. Therefore, it is not clear how
long Mr. Madsen is expected to continue with PASCO. However, any future changes in
Project Director will be subject to approval by the City.
Currently, the City has no indication of whether or when USA Waste/WMI will request or
make personnel, operational, budgetary or managerial changes in the future. However,
staffs discussions with other municipalities would indicate that there may be such changes
in the future, which would affect services and costs.
Discussions with Other Cities
Staff contacted several other municipalities in the Bay Area who have gone through a similar
transition from small waste hauler to USA Waste/WMI to ascertain their thoughts about the
experience. Based on those limited contacts, staff has concerns regarding future service,
future communications, and rate stability. Staff’s recommendation of a negotiated new
agreement, which would address, among others, such terms as liquidated damages, a
workable definition of force majeure, financial disincentives for labor Strikes, and
performance standards, was confn’rned by these discussions with other cities.
MEMORANDUM OF UNDERSTANDING
The City cannot prevent the acquisition of PASCO by USA Waste/WMI. However, staff
believes it is reasonable to agree to the resulting newcontractual relationship under certain
conditions:
Staff believes that a long-term continuing relationship with the new PASCO owners’ can be
effective only if the parties can successfully negotiate a new refuse and recycling agreement.
Only under a new agreement does staff believe that an. acceptable service level can be
¯ maintained and any financial impacts be minimized. To that end, staff recommends that it
cornmenee negotiating with USA Waste/WMI.
CMR:402:98 Page 3 of 4
The first intended product of that negotiation would be an MOU, which would set forth the
types of provisions to be covered in a new agreement as well as a timetable for those
negotiations, including a deadline for reaching agreement. It is staff’s belief that the parties
should be able to negotiate the MOU before March 1, 1999. If that date cannot be met, staff
is concerned that the process of negotiating a new refuse and recycling agreement may be
difficult.
Therefore, staffis recommending that the Council at this time g~mat staffthe authority to give
notice of the City’s intent to sunset the agreement in 2004 if the MOU has not been agreed
to and presented to Council for approval prior to March 1, 1999. At that time, staff could
continue to negotiate with USA Waste/WMI, but could also prepare to put the contract out "
for. competitive bid. PASCO, of course, would continue to provide service until the term of
the existing contract ended on June 30, 2004.
RESOURCE IMPACT
The full extent of required resources is not known at this time. However, should costs for
professional services such as outside counsel, consultants etc., require additional funding,
staff would request a midyear adjustment from the Refuse Fund Reserve.
Recommendations are consistent with existing City policies.
Attachment A: Dirk Dudgeon’s September 29, 1998 letter to June Fleming
PREPARED BY: Karen Gissibl, Executive Assistant, Operations Division
DEPARTMENT HEAD APPROVAL:
Director, Administrative Services
DEPARTMENT HEAD APPROVAL: ,
GLENN S. ROBERTS
CITY MANAGER APPROVAL:
Director of Public Works
~ FLEMING
Manager
CIVIR:402:98 Page 4 of 4
ATTACHMENT A
98 SEP 29 P~’I I~ 00
CITY MANAGER’S
September 29, 1998
WASTE MANAGEMENT
Western Area
155 North Redwood Dri~’e
Suite 250
San Rafael, CA 94903
(415) 479-3700
(415) 479-3737 Fax
VIA HAND DELIVERY
Ms. June Fleming
City Manager
City of Palo Alto
250 Hamilton Avenue
P.O. Box 10250
Palo Alto, CA 94301
Re: Palo Alto Sanitation Company
Dear Ms. Fleming:
In the interest of providing you with a prompt response, your letter to Mr. Sobey dated
September 18, 1998 which we received on September 24, 1998 has been forwarded to me.. We
believe that the information included herein will respond to each of your questions and we would
like to request that the City consider addressing Mr. Madsen’s request for the City’s consent at
the October 13, 1998 City counsel meeting. We look forward to working with you to address
all .of the City’s concerns and we are confident that you will find that USA Waste of California
("USA") more than meets the qualifications to assist Palo Alto Sanitation Company ("PASCO’)
in continuing to provide excellent service to the City.
With respect to the items set forth in you letter we have the following responses:
1. A copy of the Stock Purchase Agreement between USA and Mr. Madsen for the
purchase of stock of PASCO is included as Schedule 1. Our lawyer, Marc Empey, has met with
the City Attorney, Mr. Calonne, and has informed him that the financial arrangements contained
in the agreement are subject to a confidentiality agreement between USA Waste and
Madsen. Therefore, those portions of the contract have been redacted. As you can see, USA
Waste will be acquiring 100% of the stock of PASCO.
2. As discussed in item 1 above, the value of the transaction is a confidential matter.
We wish to assure the City, however, that acquisition costs will not be included in any future
rate review process and the purchase price has not been reaci~ed, and is not contingent upon,
receiving rate increases. We have never requested that any such cost be included in rates and
¯ recovery would not be allowable under PASCO’s agreement with the City. We expect any
Ms. June Fleming
September 29, 1998
Page 2
future rate issues will be handled in accordance with PASCO’s agreement with the City and past
practices.
3. Following the closing of the transaction, PASCO will remain as a separate legal
entity. Therefore, nothing will happen to its retained earnings as the stock is transferred.
4. Pursuant to your request, enclosed herewith on Schedule 4 is a list by county of
the municipalities where USA and its affiliates and subsidiaries provide collection, disposal or
other waste related services.
5. As set forth in the Stock Purchase Agreement, only the ownership of the shares
of capital stock of PASCO will change from Paul Madsen to USA. PASCO will survive the
closing as a separate legal entity with Paul Madsen retaining Project Director duties and
authority.
6. At this time we are not requesting approval for a change in the Project Director.
Mr. Madsen will remain with PASCO as the Project Director. Any future changes in Project
Director will, of course, be subject to approval by the City.
-7.We do not anticipate any personnel changes.
8. We do not anticipate any operation changes after the. sale, except that the
employees will be offered the USA benefit plans including, health insurance, stock options and
401(k) plan. We will also institute more sophisticated internal accounting and auditing
.procedures consistent with those of a publicly traded company, which should facilitate the City’s
review.of financial issues.
9. As you know Mr. Madsen has never prepared a five-year plan. He was not
required by us to do so in connection with this transaction and USA has not prepared, and does
not intend to prepare, a five-year plan. Consistent with USA’s practice, PASCO will continue
to budget on an annual basis to meet the changing needs and requirements of the City.
10. Since we do not anticipate any personnel, compensation or operating changes in
PASCO, it should be able to continue to provide the same level of service with respect to the
City’s solid waste and recycling programs as has been provided in the past. In addition~ as a
statewide company, with an international parent, USA has experience in, and actively
participates in, a significant number of recycling programs tailored to various municipalities and
other governmental entities. We are prepared to. use our resources to augment the current
recycling programs, should the City so desire.
Ms. June Fleming
September 29, 1998
Page 3
1.1. We fldly expect to continue negotiations with the.City for a new solid waste and
recycling agreement. Mr. Empey has also spoken with the Cit~, Attorney regarding this matter
and assured him that we will continue, in good faith, to negotiate the new agreement as
expeditiously as possible.
As discussed above, we would like for this matter to be considered at the October 13,
1998 City Council meeting. We look forwardto working with you toward a long term mutually
beneficial relationship. Should you have any questions regarding this matter, please do not
hesitate to contact me.
Very truly yours,
Dirk Dudgeon
Vice President
cc: Ariel Pierre Calonne, City Attorney